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Testimony

Commerce Department Restructuring

By
Edward L. Hudgins

July 27, 1995

Committee on Governmental Affairs
United States Senate

I want to thank the committee for the opportunity to testify today on plans to restructure or dismantle the Commerce Department. I shall address myself principally to the National Institute of Standards and Technology’s Advanced Technology Program (ATP). But this program is just one example of many government efforts to advance science and technology by passing out taxpayers’ dollars. I submit that most of these efforts are ill- founded and that this discussion of the Commerce Department should open the general question of the government’s proper role in science and technology.

Dismantling Commerce.

Before considering technology programs I want to endorse a policy of dismantling the Commerce Department piece by piece. It would be legislative slight-of-hand to retain most of the Commerce Department’s activities and functions by transferring them piecemeal to other departments, perhaps cutting back on some overhead and a few of the more clearly expendable offices. I note that starting around 1986 the Mexican government claimed to be following a policy of privatization while in many cases only reorganizing bureaus and changing the titles on the office doors. Those of us who followed events in that country saw through this sham. While Mexico went on to pursue genuine privatization, the sort of tricks they occasionally played are well known and we will be watching for them as Congress considers genuine downsizing of government.

Consider some examples of genuine Commerce Department dismantlement would include:

Abolish the U.S. Travel and Tourism Office, eliminate its functions, and dismiss its personnel or allow them to take other already open positions for which they are qualified in other departments. Every major hotel, amusement park, airline and state government in the country floods the world with information about the advantages of visiting America. This is not the federal government’s business in any case;

Abolish the Economic Development Administration, eliminate its functions, and dismiss its personnel or allow them to take other already open positions for which they are qualified in other departments. This 1965 Great Society program simply redistributes taxpayers’ dollars to various parts of the country in wasteful public works and other projects;

Abolish the Minority Business Development Agency, eliminate its functions and dismiss its personnel or allow them to take other already open positions for which they are qualified in other departments. This agency contributes little help to minority businesses. In any case, the government should not engage in race-based discrimination. The best way to help small enterprises, minority or otherwise, is to keep taxes low and regulations minimal.

Eliminate Commerce Department export promotion functions. This is a form of corporate pork that we can do without.

Commerce and Technology Policy

Turning now to technology policy, the Clinton administration originally sought $491 million for FY 1996, up from the $431 million in projected expenditures for FY 1995. Further, the administration sought $147 million for the Manufacturing Extension Partnership (MEP) for FY 1996, up from some $91 million in the current fiscal year. The House proposes to zero out these programs.

These expenditures are examples of unneeded corporate welfare, wasted in a market that already produces world-class technology. It is of such expenditures that budget deficits measured in the hundreds of billions of dollars are made.

I suggest that the correct level of expenditure for these programs is zero. I frame the discussion and offer reasons as follows:

Generally, the federal government should only expend taxpayers’ funds to protect directly life, liberty, property and the Republic, with the burden of proof for other expenditures place on those seeking funds or intervention.

By this standard there is a prima facia federal government role to perform a census function, since this power is granted it by the Constitution, and is necessary to determine voting eligibility. Similarly, the federal government has a Constitutional role in the protection of intellectual property by granting patents. Thus these two Commerce Department functions should be retained in some form, though preferably in other agencies. Other Commerce functions and expenditures do not prima facia meet these criteria.

Commerce handouts are justified by the fallacy of focusing on the recipients.

Bureaucrats handing out other people’s money often justify their programs based on two facts: First, that the recipients of the funds approve of the handouts; and second, that the recipients spend that money on something of which most people approve. And I suspect much of the testimony that you will hear in favor of the ATP and MEP will be based on—I would say bogged down in—these two facts.

But these facts are true almost by definition for every federal government handout. Most individuals receiving free goods are pleased to have them and would like the handouts to continue. If one dropped money from a plane over Washington and traced each dollar, one would find first that everyone picking up the money was happy to have it, and, second, that most individuals spend the money in ways we approve, for example, to purchase food or shoes, or to invest in a small business. But this would not be good public policy. And third, the government would take credit for the prosperity of any individuals who picked up a few dollars, ignoring the fact that in nearly all cases, individuals, like businesses, prosper through their own efforts, not through transfers of wealth. If these are the only arguments in favor of a particular government expenditure, including the ATP and MEP, they are not sufficient.

The market works well without government handouts.

The private sector is the principal engine of this country’s multi-trillion dollar economy, not government handouts. In the area of advanced commercial technologies, that is, the high-tech revolution of the past 15 years, the private sector already does a world-class job in developing new products and technologies. Thus, ATP is unnecessary.

The way a market system—as opposed to a corporatist or socialist system—works is that if there is a prospect for a profit, entrepreneurs will risk investing in order to reap profits. For example, the cost of bringing a new pharmaceutical product to market is now on average $390 million. Yet drug companies make such investments. If there is a profit to be made, entrepreneurs will act with or without government handouts.

Bureaucrats have no special talent for picking winners and losers.

Federal bureaucrats have no unique abilities, better than those of private investors and entrepreneurs, to pick winning companies and technologies. It is not by virtue of their keen abilities to spot future market needs or their creative talents for inventing new products or services that bureaucrats acquire power to disburse investment funds. It is by virtue of their ability to function well in a rule-bound organization that is insulated from market forces, or their ability to secure a political appointment. If anything, one should suspect that the capacities that make for successful bureaucrats and politicians would make dull, incompetent entrepreneurs.

To put it bluntly, if bureaucrats and political appointees did have special abilities to pick winners and losers, they would become entrepreneurs or would work for entrepreneurs, and actually produce the new products for which they claim consumers clamor. They would put their own money, not taxpayers’, and their creativity and energy, where their mouths are.

It is important to note that bureaucrats tend not to discover the Steve Jobs and the Bill Gates of the world.

The government’s record of success in subsidizing enterprises is abysmal.

Here are offered but a few example of this history.

In the 1970s Department of Commerce, which oversees ATP and MEP, issued $1.23 billion in loans and loan guarantees through various programs. Not even half were paid back. The American taxpayers lost over $650 million. And those loans still carried on the books are of questionable value. For example, the Economic Development Administration at Commerce, which lent $471 million in the 1970s but has recovered only $60 million to date, recently sought congressional approval to sell off some of its bad loans for less than ten cents on the dollar.

On the more focused issue of advanced technology, recall that the Supersonic Transport (SST) plane in the 1960s was considered a “crucial” commercial technology and gobbled up $920 million in taxpayer dollars. The result: Congress mercifully put the project out of its misery in 1973. The benefit to the public: None. By contrast, the governments of France and Britain continued to fund their SST. Now they operate a few of these planes at a huge loss and have not even come close to covering the costs of development.

High Definition Television (HDTV) is one of the clearest failures of the government’s targeted handouts. Japanese businesses, with subsidies that totaled $1 billion from their government, in the late 1980s sought to develop HDTV using existing analog technology. Thomson Consumer Electronics of France, a subsidiary of that country’s state-owned Thomson S.A., received around $1 billion to develop a similar system. American firms sought, but were denied by the Bush administration, $1.2 billion in subsidies to compete with these foreign rivals. The U.S. government in the end probably spent $200 million for miscellaneous research and feasibility studies. As a result of being denied massive subsidies, American companies were forced to develop an even better, more efficient form of HDTV.

Zenith and American Telephone and Telegraph invented a fully digital system that made the analog Japanese and European systems obsolete before they even went into production. Japan has announced that it will abandon its system, losing its $1 billion in government funds and private investment, and adopt the American system. The French firm also lost over $1 billion. If the Bush administration had listened to those seeking subsidies, all countries would be working with inferior technologies, and American firms would be just a few among the many mediocre.

The ATP is indeed a high-tech version of the Small Business Administration (SBA): wasteful and counterproductive.

The ATP has been called a high-tech version of the SBA. This is a good analogy because SBA has an abysmal record, with a default rate of around 20 percent. Some 99.8 percent of American small businesses do not receive SBA assistance. As long ago as 1963 Life magazine described SBA as “an almost brand-new device for soaking up money and getting rid of it.”

The proposed ATP expenditures are the kind of corporate welfare against which the Clinton administration inveighs.

Even when an investment does promise to pay off and there are willing private investors, businesses often are still willing to defray expenses by accepting handouts taken from taxpayers; and the federal government is willing to transfer such funds so that politicos can curry favor with recipients and claim to be friends of business. Labor Secretary Robert Reich correctly denounces such handouts as corporate welfare. Yet the Clinton administration still wishes to hand out such welfare through ATP. Among the 1994 recipients of corporate welfare:

3M-3M Center received 6.1 million over five years to develop film technologies to replace aircraft paint;

BP Chemicals received $5.2 million over four years to develop dual-purpose ceramic membranes;

Caterpillar Inc. received $3 million over three years to develop engineered surfaces for rolling and sliding contacts;

Texas Instruments received $2.2 million over 28 months for a single-chip receiver front-end with integrated filters, and $2 million over three years for ultra-low k dielectric materials for high-performance interconnects;

DuPont Fibers received $9.6 million over five years for thermoplastic composites for structural applications;

IBM received $1.9 million over three years for a framework for enhancing computer-integrated manufacturing;

Xerox Corporation received $1.8 million over three years for reusable performance- critical software components.

These are hardly new, poverty-stricken, desperately struggling businesses that cannot fend for themselves without corporate welfare.

The funding decisions for these handouts are often based on political concerns.

The list above of large corporations receiving funds is enough to suggest that political influence plays a part in distributing largess.

Here I wish to call attention to the National Aeronautics and Space Administration (NASA), not only as a wasteful agency, and one that is an obstacle to space enterprise, but also as a highly politicized agency.

In the early 1970s, as NASA saw Moon landings curtailed and Moon bases ruled out, it sought to preserve big budgets and staffs. Its new big-ticket project, the Space Shuttle, was sold to policymakers as a reusable and thus cheaper way to put payloads in orbit than expendable launch vehicles. It turned out to be more expensive than expendable launch vehicles. But many of the large contractors lobbied hard for the project.

As NASA developed and flew early Shuttle missions, it had to fend off private competitors. In the late 1970s and early 1980s federal agencies were forbidden to contract with the infant private launch industry to put government payloads in orbit.

In the early 1980s, as the Shuttle was seen as a costly white elephant, NASA needed a mission to justify the Shuttle’s continued existence. Aside from any commercial or scientific benefits, an orbiting space station seemed to serve this purpose. Again, large contractors led the lobbying for this project. Most space scientists see the station as wasteful.

A special Presidential Advisory Commission, chaired by Martin Marietta Corporation CEO Norman Augustine, in 1991 stated that “We do not believe that the space station … can be justified solely on the basis of the (non-biological) science it can perform, much of which can be conducted on Earth or by unmanned robots.”

Some businessmen do realize that corporate welfare in the end only harms them and the economy.

On March 25, 1993 Dr. T.J. Rodgers. President and CEO of Cypress Semiconductor Corp. testified before the House Committee on Science, Space and Technology, Subcommittee on Technology, Environment and Aviation on government subsidies for high-tech innovations. After showing several of his company’s products, Rodgers observed that “we would benefit greatly if billions of taxpayer dollars were showered on the various technology projects favored by the Clinton administration.” He then made his main point:

But I am here to say that such subsidies will hurt my company and our industry.Why? Because they represent tax-and-spend economics—a brand of economics that is a known failure. I do not want handouts. The men and women of our company do not want handouts. And if Congress wants to help American high technology, handouts are the wrong way to go.

This is the attitude that businesses and Congress should take towards technology policy. I call your attention to this testimony.

The U.S. Constitution does not allow for government subsidies of private commercial endeavors.

I realize that to bring up the U.S. Constitution in the U.S. Congress is a bit of an anachronism. But I believe that if we are to reestablish a republic of limited government in this country, we must refer to the law upon which it was and should be based.

Article I, section 8, [3] of the Constitution gives Congress the power “To regulate Commerce … among the several States…” This was meant to allow the federal government to remove trade barriers between states. In this century the federal government has used—I should say misused—this power to regulate the way entrepreneurs actually run their enterprises. But it is an unreasonable stretch to maintain that this paragraph implies that the government regulates by passing out taxpayer dollars to favorite industries.

Article I, section 8, gives Congress the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” This quite clearly refers to protection of intellectual property rights, not to passing out checks to favored industries.

Summary

The bottom line is that Commerce Department handouts to businesses through the ATP are not needed. The kind of government-business partnerships promoted by the MEP have some unique problems of their own but, on the whole, the above criticisms apply to these as well.

The United States and, for that matter, all Western industrialized democracies are struggling overcome the economically debilitating effects of their corporatist, government- dominated regimes. Rearranging the deck chairs on the sinking ship is not enough. The federal government must shed entire functions and agencies. The Commerce department is a good place to start.